On Monday the Mortgage Bankers Association (MBA) sent a letter to the Federal Housing Administration (FHA) administrator laying out the association's objections to and in some cases agreement with new rules recently proposed for the FHA Lender Indemnification (LI) Process. These lenders are able to endorse FHA mortgage loans without a pre-endorsement review by FHA. The rules were announced on October 8 by FHA Commissioner David Stevens who said at the time, "It's important that our expectations are crystal clear. We need to clarify which circumstances we'll require indemnification and the level of loan performance we expect lenders to maintain."
The letter, signed by John A. Courson, president and chief executive officer of MBA and directed to David Stevens, said the MBA appreciates that programmatic and operational changes are necessary to ensure FHA sustainability and restore confidence in the mortgage industry and accepts accountability for instances of fraud and negligence within their control. But, the association said, HUD should recognize that increasing lender risk could discourage participation in the program and cause lenders to tighten their own guidelines. His organization, he said, expects that the proposed rules are establishing the groundwork for future, more wide spread changes for all FHA lenders.
Under the guidelines, LI lenders may be required to indemnify HUD if they failed to: (1) verify and analyze the creditworthiness, income, and/or employment of the borrower; (2) verify the source of assets brought by the borrower for payment of the required downpayment and/or closing costs; (3) address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property; or (4) ensure that the property appraisal satisfies FHA appraisal requirements. HUD may seek indemnification irrespective of whether the violation caused the mortgage default.
The changes proposed by FHA and the MBA response to each are summarized below.
- Lenders may be required to indemnify HUD in cases of fraud or misrepresentation at any time but FHA intends to codify a "reasonable time period" in cases where the mortgagee merely failed to meet FHA requirements. It has been HUD's long-standing practice to require indemnification "within five years from the date of mortgage insurance endorsement."
MBA believes that five years is too long a time period from the date of origination and recommends an alternative standard of three years. After five years, problems that occur with the loan typically are due to changing events beyond the lenders control rather than underwriting or other origination issues. This rule applies if the mortgagee knew or should have known of serious and material violations. MBA is concerned this gives FHA the latitude to apply unrealistic standards to lenders in an effort to protect its own financial security. Of particular concern is the ability of FHA to require indemnification regardless of whether the violation caused the default. The "serious and material" definition should specifically exclude errors that nave no effect on the eligibility or default of the loan and should not state that it be applied "irrespective of whether the violation caused the mortgage default.
- The proposed rule will require LI lenders to continually maintain an acceptable claim and default rate, both to gain this special lender status as well as to preserve it. HUD proposes that all new unconditional direct endorsement lenders who have the authority to self-insure mortgages must demonstrate a default and claim rate at or below 150 percent for the previous two years. This standard would apply to the state/states where the lender does business, rather than a national default/claim average.
MBA believes that, given the current volatility of the market, "continually maintain" is too absolute a requirement and holds lenders to standards that are not reasonable. MBA requests that FHA recognize that fluctuations that occur in lenders default rates are sometimes beyond the lender's control. MBA, however, supports the change allowing acceptable claim and default rates be computed on the mortgagee's actual area of operations rather than on the national average.
The intention of FHA to "continually" review is very vague and does not clearly express the timing of reviews or give lenders the opportunity to self-correct problems they identify through their own monitoring. MBA requests that FHA maintain its current policy of a yearly review or more concretely define "continual".
MBA also requests that streamline refinances be treated differently as their performance "diverges significantly from purchase or other refinances" primarily as a result of FHA determined program criteria.
- FHA, at its own discretion (without any judicial or administrative action) also clarifies that it has the authority to immediately withdraw a lender's ability to self-insure mortgage loans.
MBA believes that this language is too broad and is disturbed that there is not a cure period or an appeals process for a lender to contest violations.Even though HUD specifies that lenders who have their LI authority terminated could still participate as direct endorsement (DE) lenders, it does not recognize the difficulty that lenders would have changing from LI process to DE processes.
- FHA will consider the two-year default and claim performance of either entity in the case of acquisition or merger without requiring these entities to seek a waiver.
MBA supports the conditions under which HUD may grant LI authority to a mortgagee with less than the required historical performance in a merger. It requests, however, that FHA retain the ability to grant reasonable exceptions to the policy and grant a waiver when necessary to allow for the continuation of business transactions.